Oil and gas markets, as well as the technology to produce, distribute and utilize them, are evolving to meet growing global energy needs. In this exclusive interview with The Energy Report, Frank Curzio, editor of the Penny Stock Specialist newsletter, brings us up to date on his views for what lies ahead in the energy markets and offers several ideas for investors seeking underpriced bargains with great growth potential. While his newsletter's definition of penny stocks extends beyond pennies, he believes that the opportunities are in the dollars.

The Energy Report: Frank, when people hear "penny stocks" they usually take those words quite literally and think in terms of stocks certainly trading under a dollar, if not under two bits. Your definition, as editor of Penny Stock Specialist, is a little broader. Tell us why.

Frank Curzio: Sure. Penny Stock Specialist is more of an under-$10 newsletter. We do have some penny stocks in there, but you may see some large caps that trade under $10 as well. About 80% is in small caps. In May, most small caps were trading at their most expensive valuations to large caps in more than three decades. That was before we saw seven straight weeks of declines. I may lean toward recommending even more mid- to larger-cap companies going forward.

TER: You follow the energy industry in a broad context, which includes everything from small oil and gas exploration companies to international majors as well as various types of service and technology companies related to energy production. Can you give us a brief overview of how you see the energy arena now compared to your last interview with us in October?

FC: There have been a lot of major changes. I do like oil right now. Most analysts and people I talk to see lower prices in the short term. But, looking at the long-term picture I think oil is getting more difficult to find. The political landscape is more challenging than ever. That is probably why every major oil company is spending billions of dollars buying shale gas assets in North America. Short term, we may see oil prices push under $90/barrel (bbl.), especially with the political motivation to release oil from the strategic oil reserves, a step that is only supposed to be taken under extreme emergency conditions.

The last time we released any significant oil from strategic oil reserves was 2005 during Hurricane Katrina. That was an emergency. Also during the Gulf War. That was an emergency, but oil at $100/bbl. is not an emergency. So, it seems more like another short-term stimulus package aimed at pushing the price of oil under $90/bbl. ahead of an election year. But longer term, I like oil and I think it goes a lot higher from here.

TER: So, what do you think the prospects are for developing any significant new reserves in the U.S. at this point? Probably not great.

FC: No, it's not great. The majors are using a big chunk of their capital expenditures buying up shale gas assets across the U.S. That tells me they are looking to transition into natural gas. I think if they could find oil they would use that capital expenditure (capex) to continue drilling to find more. Longer term, I think oil is going to be more difficult to find. And that's going to reflect in supply and demand, making the price go a lot higher.

TER: So, it appears that natural gas is the game of the day. Give us a little summary of what you think is going on there since we had the big peak in gas prices back in 2005 and 2006 and then another, lower peak in 2008. What's in the future?

FC: I think we all know by now we have a huge supply of natural gas. It's keeping prices below $5 thousand cubic feet (Tcf) at current demand levels, with roughly 80 years of supply. However, I think demand's going to pick up sharply. I think liquefied natural gas (LNG) is a major factor as we begin to export natural gas to huge growth markets like India and China. This may take a decade, or even longer, but eventually it's going to happen. Natural gas use for electricity production continues to grow each year. Right now it accounts for 23% of electricity generation in the U.S., with coal at 45%. In 15 years, I would not be surprised to see these percentages reversed. Finally, many truck companies including UPS, Huntsman and Ryder, are transitioning their truck fleets from diesel to natural gas. More than 5 million heavy duty diesel trucks in the U.S. could convert. I see all of these trends accelerating over the coming 5 to 15 years. That will increase demand and cut into supply, resulting in higher natural gas prices over the long term.

TER: We've been hearing a lot about the "fracking" controversy lately related to natural gas production. What do you see happening there and what are the possible consequences?

FC: I think the environmentalists may be bored right now. That's the only way I can explain why they hate natural gas. Maybe they prefer we use more coal. But, seriously, there have been reports that fracking leads to contamination of water. Numerous independent studies show there is no contamination being caused by fracking after tens of thousands of wells used this technology.

TER: People can't be opposed to every source of energy and domestic natural gas seems to be a more benign a source of new energy than coal or imported oil, isn't it?

FC: I'm a facts guy. I just haven't seen any evidence that supports most of these claims that are being made. If I did, then I'd probably change my outlook on the industry. Right now, there's just nothing there. So, I think there's still tremendous opportunity in natural gas. And, yes, fracking is going to be used for a very long time. That's why I continue to like the industry, especially the service providers, which continue to see enormous demand. Companies like Tetra Technologies Inc. (NYSE:TTI), Canyon Services Group Inc. (TSX:FRC) and Weatherford International Ltd. (NYSE:WFT)—which are dirt cheap at these levels—provide a broad range of oil and natural gas services.

TER: In your newsletter you follow a number of companies in the oil and gas production industry and related support and technology businesses. Can you tell us about some you particularly like there?

FC: One company I do like is Abraxas Petroleum Corp. (NASDAQ:AXAS). It's a great buy under $3.75. The company has over 160,000 acres in shale areas across the U.S., including in the Niobrara, Eagle Ford and Bakken regions. Bakken has experienced terrible weather conditions. Most companies operating in the sector lowered production estimates last quarter as roads were damaged. Many of the areas were flooded and Abraxas was no exception. So, they happened to report very weak earnings in May and the stock got crushed. However, they expect to drill five wells in the Bakken over the summer so I think the company is a steal at this price.

Moving on, GMX Resources Inc. (NYSE:GMXR) is a great play. Six months ago the company made a major transition from just a natural gas producer to an oil and natural gas producer to take advantage of the higher oil prices. This company recently entered the Bakken and Niobrara regions as well. That gives them the potential to drill over 300 wells. We're talking about a very small company here. They do have some debt issues, which is why it's trading below $5. But, they have enough cash to cover their capex through 2012. It's very cheap—trading at a 25% discount to its peers.

I also like Tetra Technologies, which I mentioned earlier. That's more of an oil and natural gas services play. As long as companies are drilling for oil and natural gas, this company is going to continue to print money. Customers include all the major oil and gas companies. We're talking BP Plc. (NYSE:BP; LSE:BP), ConocoPhillips (NYSE:COP), Royal Dutch Shell Plc (NYSE:RDS.A; NYSE:RDS.B), Chevron (NYSE:CVX), Chesapeake Energy Corp. (NYSE:CHK), Encana Corp. (TSX:ECA; NYSE:ECA), Devon Energy (NYSE:DVN). . .Tetra is the largest provider of idle well services in the U.S. After the BP oil spill, the Department of the Interior announced that 27,000 non-producing wells in the Gulf may need to be plugged. It was called the Idle Iron program. This could add a ton of business for Tetra. I think it's a big catalyst that few people are talking about. I believe the company's a steal at under $13 a share. It got hit along with the rest of the market and it's now trading at a very favorable valuation. Demand is there and growth is there as well.

FC: These are non-producing wells. The government says 3,000 definitely need to be plugged for good and it is evaluating the other 27,000 wells. Tetra is the largest provider in the U.S. of these services. So, a lot of these will need to be plugged just in case you see a possibility of another oil spill. Whenever we see major unexpected events happen, there's always an overreaction. But, Tetra Technology is going to get a lot of that business from this initiative.

TER: That sounds like some great potential. What else do you like?

FC: The last company that I have for you is called Westport Innovations Inc. (TSX:WPT). It manufactures truck engines that run on natural gas. The company has a partnership with Cummins, the largest engine manufacturer in the U.S., Weichai Power, which is a $90B engine manufacturer in Hong Kong, and also one with Volvo, the European giant. That's a $35 billion market cap company.

A lot of companies with trucking fleets are making the switch from diesel engines to natural gas. Companies used to wait for incentives from the government. Today, the economics make sense and if the government does provide incentives, that would be the best case scenario for Westport. We could see 50% of the trucking fleets in the U.S. switch to natural gas. That would be roughly 2.5 million trucks and Westport is a clear leader in this space. I think the stock will surge if this happens. The company has exposure to India, China and Europe, where millions of trucks could also make the switch to natural gas. I recommended the stock at roughly $15 a share. We are up about 50% right now. But, I think it's a huge buy under $24. I see a lot more upside for Westport.

TER: What do they have in the way of competition?

FC: There's very little competition and they're well ahead of it. They just took over an Italian competitor to get more exposure to India and other markets in Europe. In fact, they have partnerships with the major engine manufacturers in almost every area of the world. They are the cream of the crop when it comes to manufacturing engines that run on natural gas. It's a very strong buy here.

TER: What about the stations for the fuel?

FC: Well, there are other companies, like Clean Energy Fuels Corp. (NASDAQ:CLNE), which actually make the gas stations. As this transition takes place, more gas stations are going to provide natural gas over the next five to ten years. A lot of people are on hold right now to see if the government will pass the $64,000 per truck tax credit in T. Boone Pickens' proposed Natural Gas Act. But, when you're seeing companies like UPS, Ryder and Huntsman making the switch now, that's a sign the economics work right now. So, Westport is building revenue right now and if the government provides these incentives I think Westport will really skyrocket a lot higher.

TER: Do you have any other interesting situations you think our readers ought to be aware of at this point?

FC: The good thing about Penny Stock Specialist is that we're not limited to one or two industries. Right now I see tremendous opportunity in gold stocks. I think we're going to continue to throw money at every major problem we have in the U.S. We're going to see inflationary conditions eventually. I think a company like Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU), a major producer trading at 10 times earnings, is a very good buy. The economics behind it make sense and it's a huge growth model. A lot of gold stocks, if you're looking at trading, are at the same levels now as when gold was trading at $1,000/oz. So, I think there are good opportunities right now. Some small cap gold companies have sold off 20%–30%. Gold stocks seem to still have a tailwind behind them, especially on the economic front. So, it's one of the sectors I'm looking at right now.

TER: What are you expecting to happen over the summer and through the rest of the year as far as price outlook and market performance? And, what kinds of things should investors be considering in making decisions at this point?

FC: When it comes to oil and natural gas I think it's important to think in terms of the long term. Short term, it's going to be rough. I mean almost every stock that I mention here has been trading in a 40% trading range over the past two to three months. So, if you're going to buy into some of these companies, and say you want to buy 1,000 shares of a company, don't buy the whole 1,000 shares at once. Try to scale into these positions. Take advantage of volatility. So you buy 200 here, 200 there, even if it takes you six to nine months to establish a full position. If you really have a three- to five-year outlook, or even longer, you can look back and say, wow I was buying these natural gas companies below $5. Westport at $22, $23 would be a fantastic buy. The short term is going to be extremely volatile. But longer term, I think those tailwinds for natural gas and oil are still behind these companies and I think they're going to do very, very well.

TER: Do you see anything particular on the horizon that could either make the market go up drastically or down drastically if a particular thing happens?

FC: In terms of the market, definitely focus on the stimulus package. There's going to be a QE3. No one wants it, but from a market and political perspective, we will get more stimulus. I think we could see a rebound in the markets if this happens. We will also see a rebound in economic statistics. If GDP estimates pick up, we will see a rally behind many stocks. So, it's something to focus on with oil, natural gas and gasoline prices off their highs. If we do see another stimulus package—it's going to be very good for stocks in the short term.

TER: What could happen on the negative side that could blow things up?

FC: We continue to see negative data on the job market. We continue to see GDP numbers come down. Anything showing that economy is slowing will be terrible for the markets. We could see gasoline prices move considerably higher. I think that would hurt consumer spending. But, right now it's the economy. If we see economic statistics pick up a little with some improvement in housing numbers—that will be great for the stocks. On the flip side, if we still see weak unemployment numbers, stocks will fall from these levels and it's a big risk.

TER: But, generally, you feel reasonably confident that this is probably a pretty good buying opportunity and people should be accumulating those stocks that they think are undervalued?

FC: Yes. Accumulate the stocks that you think are undervalued. Every stock that I gave you today is a buy. Some small caps have gotten nailed 20% or 30%. Start picking away at some of the ones that insiders are buying. Buy companies that have beat estimates over the past couple of quarters and have pulled back along with the rest of the market. These are some of the areas I'm looking at for new ideas right now.

TER: That certainly sounds like good solid information. We greatly appreciate your time and insights and look forward to checking in with you again in the future.

FC: Thank you.

Frank Curzio is the editor of Penny Stock Specialist—an investment advisory that focuses on stocks trading under $10—and its exclusive Phase 1 Investoradvisory. With more than 15 years of investing experience, Frank is the latest addition to the Stansberry and Associates team.

Before joining Stansberry, Frank wrote a newsletter on under-$10 stocks for The Street. He's also been a guest on various programs, including Fox Business News and CNBC's The Kudlow Report and The Call and is a featured guest on CNN Radio. He's also been quoted in financial publications—both online and off—and has enjoyed numerous mentions on Jim Cramer's Mad Money. Frank's "S&A Investor Radio" is one of the most widely followed financial broadcasts in the country, and his investment strategies—value, growth, top-down and technical analysis—have regularly produced 200%–500% winners for his subscribers over the past 15 years.

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DISCLOSURE:1) Zig Lambo of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.2) The following companies mentioned in the interview are sponsors of The Energy Report: Royal Dutch Shell.3) Frank Curzio: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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